UK equities are not flavour of the month, putting it mildly. This fund,Crux UK Special Situations, also had the misfortune of being launched just before the global market sell-off (see NAV graph).
However, when asset classes are out of vogue, contrarian managers like Richard Penny come to the fore. A seasoned veteran of investing in small caps, as you can see from its holdings this fund can go across the market spectrum.
Mr Penny explains his stock picks in refreshing detail, for instance Prudential a mega cap doesn’t at first glance seem to sit naturally within his portfolio which will have a maximum of 40 holdings.
However, the insurance company announced plans to de-merge the company, separating off its UK insurance business as well its asset management arm M&G. This means that the high growth Asian business will be separate and this is what piqued his interest.
Using his calculations Mr Penny says about Prudential “the upside potential is way more than a typical large cap”.
In terms of style, Mr Penny looks for GARP, or Growth at a Reasonable Price, although with a heavy emphasis on being contrarian.
One of his favoured hunting grounds are firms that have needed refinancing, his example being Hydrodeck. This oil and waste refiner had lot of money put into it but another part of this business is one of Mr Penny’s other screens. Intellectual property.
Hydrodeck has patented methods of refining which could be dubbed a ‘moat’ or in other words a barrier to entry for others to replicate. It has a low valuation at present which is typical of many UK equities but this should grow with time. It’s an example of a micro-cap stock where other small cap managers fear to tread.
“Under £200m most people won’t do but we can at this fund,” says Mr Penny, referring to the £500 million barrier even small cap managers won’t cross.
Part of this reasoning for targeting micro-cap stocks is that it gives access to many more “interesting” deals, according to Mr Penny.
State of the market
While some would be wary of starting a UK equities fund given the current state of affairs, Mr Penny says “I like bad markets, you can make a fortune”. Bold words but at a look at his previous endeavours should hearten would be investors.
His previous shop, Legal & General Investment Managers saw him massively outperform the FTSE All-Share index during his tenure. Employing a similar approach, it is not beyond the realms of possibility that he can repeat the feat.
Mr Penny is targeting to beat the index by 5% over a three to five year period. One of the reasons he was drawn to Crux was due to its relatively smaller size. This allows funds to enjoy a nimbleness that the FTSE 100 behemoths of asset managers cannot replicate.
Anecdotally it is said that when a large asset manager has a company visit, lots of fund managers will attend which may confuse and detract from each manager’s objectives. Mr Penny only manages one fund so he can give the fund all his effort without having to juggle other commitments.
Another good sign is that he has ‘skin in the game’, he’s invested in the fund as well. This is also an important screening process for his stock picks, that is director deals. If a C-suite level board member is selling huge swathes of their stock, it doesn’t bode well for the company.
This is a fund to keep an eye on. Not only has it thrashed its benchmark, Mr Penny’s investable universe is so much bigger than most fund managers. In his words, “I feel like an artist with a lot more colours on the palate”.
Crux UK Special Situations
Fund Size £3.5 million
Fee 0.93%
Holdings Prudential, Victrex, First Derivative
Net Asset Value Growth
For more information on this fund, click here
